|
A guide to Interest
Rates:
If you have a home
loan, or are
thinking about
taking out a home
loan, you should
understand how
interest rates are
applied to mortgages
you can assess how
an increase or
decrease in interest
rates will affect
your repayments.
How Interest Rates
are Determined:
The Reserve Bank of
Australia (RBA) sets
the official
interest rate,
dependent upon how
the economy is
performing at the
time. In its monthly
meetings, the RBA
looks at the
inflation rate and
key economy
indicators such as
unemployment,
consumer price index
(CPI), Producer
Price Index (PPI)
and Retail Sales,
and from analysing
this information
sets the interest
rate.
The RBA use interest
rates as a tool for
controlling monetary
policy. For example,
if economic activity
is deemed too high
it may try to slow
things by raising
the official cash
rate i.e. stops you
from spending money
by increasing your
loan repayments.
The lending
institutions then
lend the money to
you, the consumer,
at the rate they
borrowed it at plus
their margin the fee
you pay for the use
of the money.
Visit
the RBA website
to find out more
information about
Monetary Policy.
Interest Rates on
Home Loans:
There are two
types of interest
rates that apply to
home loans -
variable and fixed.
You can choose
whether you’d like a
variable or fixed
interest rate, or a
combination of both,
depending on the
type of loan product
you decide on.
Variable Interest
Rates
The majority of home
loans in Australia
have been taken at a
variable interest
rate. As the name
implies, variable
loan rates will
fluctuate as the
market and the
official cash rate
does. Therefore if
the official cash
rate rises, your
loan interest rate
rises and so does
your repayments on
the loan, and vice
versa. Loans with
variable interest
rates tend to offer
more flexibility in
payment options.
Fixed Interest
Rates
This type of
interest rate allows
you to fix the
interest rate you
borrow at for a
certain period of
time within the
overall loan term.
Fixed terms tend to
be from one to three
years however some
lenders may offer
10-15 year terms.
With a fixed
interest rate you
have the certainty
of a set monthly
repayment as you are
not affected by
changes in the
official cash rate.
This is positive
when the official
cash rate rises as
your repayments
would not increase,
however you cannot
reap the benefits of
a reduced repayment
if the official cash
rate falls. With a
fixed interest rate
your loan provider
is taking the risk
on the market, which
is based on their
assumptions about
future interest rate
movements.
What’s Been
Happening in the
Market?
Interest
rates have been
decreasing for over
a decade, and for
the last few years
Australians have
enjoyed low interest
rates - on 23
January 1990 the
official cash rate
was 17 – 17.5%, and
on 26 January 2007
the rate was 6.25%.
What Interest Rate
is Best for You?
-
Your loan decision should be based on a mortgage product suited to your individual needs not on a type of interest rate.
-
Ensure that an increase in interest rates is factored into your loan so you are not left short.
-
You should be able to switch between interest rates over the loan term without having to refinance.
Speak to your
mortgage provider,
who should also be a
member of the MFAA.
Under of code of
practice MFAA
members are
encouraged to
continually improve
their industry
knowledge by keeping
abreast of economic
trends and
undertaking MFAA
approved and run
courses and industry
seminars.
Looking for More
Information on
Interest Rates?
Most newspapers,
television and radio
news broadcasts
contain information
on interest rates,
official cash rates
and the housing
market in their
financial and
property sections.
Additional
information can be
found on banking and
financial
institution
websites.
|
